The Benefit of Reinvesting Your Coupons — Compound Interest
Investors who reinvest their coupons reap the most benefit from their bonds.
Compounding your interest is something anyone can do by simply reinvesting their bond interest coupons. Yet, many people are not fully aware of the long-term power of compound interest.
Compound interest gives you ‘interest on interest’ — or ‘coupons on coupons’. Simply put, if you reinvest your coupons to buy more bonds, those bonds will pay coupons — which you can use to buy more bonds, and so on. This creates snowballing returns over time.
To demonstrate, say we have £1000 of a bond, with an annual coupon rate of 10%.
Our first coupon payment is 10% of £1000, £100.
If we reinvest our coupon, the next year we will have £1100 in principal.
Our second coupon payment will be 10% of £1100, £110.
Total returns with simple interest: £1,000*10%*10 years = £1,000 interest plus £1,000 capital repaid = £2,000 returned
Total returns with compound interest: £1000*(1+10%)¹⁰ = £2,593.72 returned (£1593.72 interest and £1,000 capital repaid)
Consider Virgin Media:
This bond pays a 6.25% coupon semi-annually (3.125% every 6 months, 6.25% a year) and will mature in 2029.
If we buy £1000 worth of principal today and reinvest all our coupons until 2029:
We will have been paid £908 worth of coupons by 2029. That is £252 or 38% more in coupons than the £656 we would receive if we simply took our coupons out as cash.
This is the snowballing effect of compounding returns. As we roll our snowball further and further down the hill, the effects of compounding increase. Compounding returns can significantly impact the performance of an investment in the long run
We make compounding easy.
While the benefits of compounding are significant, managing a bond portfolio is a hassle.
As such, we have made it easy to reinvest your coupons.
- Firstly you can toggle on reinvesting in your portfolio screen:
2. For Robowise customers, update your Robowise settings:
By enabling reinvest on our platform you can rest assured that your money will continue to churn, enhancing your wealth building potential with the power of compounding returns.
So bear in mind there are serious long term advantages from continuously reinvesting your coupons.
For other interesting articles make sure to follow our blog to learn more about corporate bonds.
As with all investments your capital is at risk. WiseAlpha members purchase Notes which are fractions of individual corporate bonds.
See full Risk Statement at www.wisealpha.com